Who's Benefitting From China's Accelerating Capital Outflow?

There’s a one-word explanation for these anomalous price movements: China.

Chinese capital outflow has picked up again, and Beijing’s measures to stop the flight have proven—once again—to be ineffective.

Last year, net capital outflow amounted to $676 billion according to the Institute of International Finance, $911 billion according to J Capital Research, and $1 trillion according to Bloomberg.

The general consensus is that Beijing this year has been able to reduce the outbound flood. Citigroup Global Markets estimates there was in the first half of the year net capital outflow of between $281.7 billion and $286.6 billion. It also predicts full-year outflow of $573.2 billion. Citigroup’s annual figure is close to that of the Institute of International Finance, which expects outflow of $530 billion.

In 2015, it appears that outflow increased substantially in the second half, and fragmentary evidence suggests that pattern will repeat this year.

In July, for instance, the gap between China’s imports from Hong Kong, as reported by Beijing’s General Administration of Customs, and Hong Kong’s exports to China, as reported by Hong Kong’s Customs and Excise, hit a record. Hong Kong statistics show exports to China fell 6.2% in the month, but China showed an increase of 122.9% in imports from Hong Kong.

The discrepancy, which should be negligible if it exists at all, was $2.4 billion that month, the biggest since 2006 when these statistics were first tracked. The previous record was set in May: $2.2 billion.

The widely followed discrepancy, which has persisted for months, is thought to show trends in money movement. At times of outflow like the present, Chinese importers overstate on trade documentation the value of goods they buy from abroad so that they can smuggle out cash from the mainland. Hong Kong is part of the People’s Republic—like Macau, it’s called a “special administrative region”—but it is outside Beijing’s customs border.

Analysts have pointed to the surprising uptick in Chinese imports in August—up 1.5%, the first increase since October 2014—as a sign the Chinese economy has stabilized. What the uptick may mean, however, is that Chinese holders of capital are busier faking import documentation, in other words, more pessimistic about their country.

The Chinese are not pessimistic about Hong Kong, however. And they have a right to be upbeat because the markets in the city are now benefitting from a “buying frenzy.”

The China-created boom is affecting many asset classes. Take non-luxury residential property. On the 10th of this month, projects released for sale sold out immediately with “massive over-subscriptions” for flats.

Mainland buyers are not much of a factor in this segment, but they are in high-end apartments and price increases for luxury units have pulled up values across the board. Moreover, mainland developers—Minmetals Land, China Vanke, and China Overseas Land and Investment, among others—are taking cash out of China and moving it into the Hong Kong market, bidding up prices for plots in the city.

In other segments, China’s influence has been direct and immediately felt. First, there is top-of-the-line office space. Leading property firm Knight Frank released a survey on Thursday showing mainland purchasers bought 64% of Hong Kong’s Grade-A offices in the first half of the year, spending $2.9 billion.

Talk about accelerating capital outflow. The $2.9 billion figure is 45% of the total mainland parties purchased over the past decade, when they committed $6.4 billion to this sector.

“They are willing to pay a premium, and I will not be surprised if we see more record-breaking deals,” said Marcos Chan of CBRE, a commercial real estate firm, to the South China Morning Post, referring to Chinese financial firms. “In the foreseeable future, mainland enterprises will continue to be the dominant buyers.”

Second, rents in the city, the highest in the world at $278.50 per square foot per year, are propelled by the Chinese. In Central, the core of the Hong Kong market, about half of new lettings are to mainland firms.

Third, stocks are riding a boom fueled by Chinese money. Mainland punters have driven the Hang Seng Index to a one-year high this month, on the 9th. The outflow is evident from the southbound—China to Hong Kong—movement of cash in the Shanghai-Hong Kong Stock Connect.

Fourth, the Chinese in China are going big on Hong Kong insurance policies and products, showing that even non-wealthy in the mainland are trying to get money out.

In the first six months of the year, premium income of Hong Kong insurance companies from Chinese buyers was up 117%. Such income, amounting to $3.9 billion, was 95% of the total for all 2015.

Premiums increased even though Beijing in February clamped down on the use of UnionPay cards to buy offshore insurance, vigorously enforcing a $5,000 cap for this purpose.

This year, the outflow looks like it has been linked to concerns about the depreciating renminbi. Hong Kong’s dollar is pegged to the greenback, giving the U.S. currency a safe-haven status. At the same time, Brexit fears have made both the pound and euro look less attractive.

Beijing, most months, has been supporting its currency to reduce the incentive to push cash offshore, but even though it is holding large forex reserves, it cannot keep the renminbi artificially high for long. For one thing, such a maneuver is devastating exporters, which explains why exports have been continually in the red.

The Chinese currency, allowed to depreciate in a controlled fashion since August of last year, is down this year—2.7% against the U.S. dollar and more on a trade-weighted basis. The steep fall partially explains the increased outflow to Hong Kong.

When Beijing finally cannot support its currency, Hong Kong will probably experience an historic boom, whatever its economic prospects may be at the time.

This article was written by Gordon G. Chang from Forbes and was legally licensed through the NewsCred publisher network.

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